Question

Problem 7-72BExpenditures After Acquisition

Objective 3Understand the concept of depreciation.

4Compute depreciation expense using various depreciation methods.

5Distinguish between capital and revenue expenditures.

Murray’s Fish Market, a store that specializes in providing fresh fish to the Nashville, Tennessee, area, installed a new refrigeration unit in January 2018 at a cost of $27,500. The refrigeration unit has an expected life of 8 years and a residual value of $500 when installed. As the fish market’s business increased, it became apparent that renovations were necessary so that the capacity of the refrigeration unit could be increased. In January 2020, Murray’s spent $18,785 to install an additional refrigerated display unit (that was connected to the original unit) and replace the refrigeration coils. After this addition and renovation, Murray’s Fish Market estimated that the remaining useful life of the original refrigeration unit was 12 years and that the residual value was now $1,000.

Required:

1. Compute 1 year’s straight-line depreciation expense on the refrigeration unit before the addition and renovations.

2. Assume that 2 full years of straight-line depreciation expense were recorded on the refrigeration unit before the addition and renovations were made. Compute the book value of the refrigeration unit immediately after the renovations were made.

   Answer

3. Compute 1 year’s straight-line depreciation expense on the renovated refrigeration unit. Round your answer to the nearest dollar.

   Answer

Problem 7-74BDisposition of Operating Assets

Objective 7Describe the process of recording the disposal of a fixed asset.

Salva Pest Control disposed of four assets recently. Salva’s accounting records provided the following information about the assets at the time of their disposal:

Asset	Cost	Accumulated Depreciation
Pump	$ 6,200	$ 4,800
Truck	18,600	17,500
Furniture	4,200	3,850
Chemical testing apparatus	6,800	4,000

The truck was sold for $2,450 cash, and the chemical testing apparatus was donated to the local high school. Because the pump was contaminated with pesticides, $500 in cash was paid to a chemical disposal company to decontaminate the pump and dispose of it safely. The furniture was taken to the local landfill.

Required:

1. Prepare a separate journal entry to record the disposition of each of these assets.

   Answer

2. CONCEPTUAL CONNECTION Explain how the disposals of the fixed assets would affect the current period financial statements.

Answer 1

Problem 7-72 B:

(i) 1 Year's Straight line depreciation expense on the refrigerator unit before renovation

= (Cost - Residual value) ÷ Use life of an asset

= ($27,500 - $500)/8

= $ 3,375

(ii) 1 Year's Straight line depreciation expense on the refrigerator unit after renovation

= (Book Value of refrigerator as on January 2020 after additions - Revised residual value) ÷ Remaining estimated useful life

= ($39,535 - $1,000) ÷ 12 Years

= $38,535/12

= $3,211

Problem 7-74 B:

Asset disposal entries of Salva pest control

Account Title	Debit	Credit
Cash	2450
Accumulated depreciation-Truck	17500
Truck		18600
Gain on disposal		1350
[sale of truck]
Donations	2800
Accumulated depreciation - Chemical testing apparatus	4000
Chemical testing apparatus		6800
[donation to high school]
Loss on disposal	1900
Accumulated depreciation - Pump	4800
Pump		6200
Cash		500
[disposed off the pump]
Local Landfill	350
Accumulated depreciation - Furniture	3850
Furniture		4200
[furniture taken by local landfill]

Affect of disposals of fixed assets on current period financial statement:

Current year net income will be decreased by 'Loss on disposal of fixed asset' & Increased by 'Gain on disposal of fixed asset'